When Brandon Sparks with Barton Creek Lending Group, a preferred Lender as a Dripping Springs Elite Real Estate Professionals advertiser, was asked to participate in a PR study with Bankrate and a R/E brokerage partner, of course he obliged. Brandon has the expertise and experience to draw the attention of the most reputable companies and his knowledge and insight is a valued asset. If you’re in the market to buy or sell a property then this study may be able to help you navigate the current economic situation and the best time to make a move.
Q: Please briefly explain what inflation is, what causes it, how it is calculated, and how the Federal Reserve influences inflation in any way.
A: Inflation is the loss of buying power. This is caused by actions within the economy and in our current case…an effect of COVID lockdown, the Federal reserve’s policies associated with keeping the economy floating during that time as well as their lack of action during 2021 when the numbers began posting as early as mid Feb. There are different views of inflation. Real inflation is a measure that I believe is a more accurate read because it reflects the cost of living and the cost of goods. The FED considers an inflation value that strips out food and energy prices and represents, then, a lower percentage. I don’t agree with this model because consumers spend a large portion of their income on food and energy, but since the FED cannot control the pricing of these two aspects….they leave it out. FED can influence inflation with monetary policy (i.e. rate hikes or cuts), open market operations like buying and selling bonds (i.e. quantitative measures). Controlling inflation is one of the most important mandates of the FED
Q: Briefly, what is the current state of inflation, and how has the rate of inflation increased over the past year/two years?
A: Inflation is at 42 year highs, no matter how you slice it. The rate of inflation has exploded upward over the last two years
Q: Please explain the relationship between inflation and the housing market – how home prices and mortgage rates are impacted by inflation in any way, especially lately.
A: Housing prices have inflated in our market due to robust demand for living space and job growth relative to a very low inventory. There are social drivers in our market which are attractive and COVID also created a slight culture shift on where and how we want to live and work. Supply chain shortages have exasperated this phenomenon. Mortgage rates on the other hand represent fixed income to investors. The loss of buying power due to inflation for these asset classes make them less desirable. When demand for mortgage backed assets falls…naturally the yields (also known as mortgage rates for consumers) must rise to meet the yield demands of the market. Thus, higher inflation results in higher mortgage rates.
Q: In what ways can purchasing a home be a reliable hedge against inflation? This is the heart of my story, so please devote extra attention to your answers here and try to provide at least a couple of ways/examples with math, if possible.
A: If you review the Case- Shiller index on housing appreciation over the last 22 years you will see a trend. The trend represents periods of time where we had not only higher inflation but also recessions. Relative to the 2000 era we can see that preceding the recession we see the rise in the FEDs favorite measure of inflation the personal consumption expenditure or (PCE). Housing appreciation stayed constant or rose during these times with the exception of 2008 of course. This remains true of appreciation relative to recessions all the way back to 1960 with the only exception, again, being 2008. 2008 was characterized by 3.7m homes for sale (relative to about 1m homes for sale US today), lending products with 0% down/high leverage and virtually no staunch income underwriting standards, and loose secondary market standards…and a population household that is 12m less than we have today. The first 2 graphs below depict the historical data I am referring to.
Q: Is higher inflation good for homeowners? Does it mean their homes will increase more quickly in value?
A: It is my view that higher inflation is not good for the US dollar and therefore not good for anyone. Appreciation is great for homeowners…but uncertainty and volatility have been challenging for our market. I would not say that inflation is a good thing. This can also be noted that at the time of me writing this, the actions of the FED to combat inflation seem to be taking an early foothold to combat inflation and control and engineer for a short weak recession. Q3-Q4 will be the “tale of the tape” for us to see how this plays out but for the first time in 20 years the USD is equal to the EURO and that represents the regaining of strength for our dollar in a good way.
Q: Did a lot of investors purchase homes during the pandemic, and was this a smart move considering the inflation rate over the past two years?
A: Yes investors did purchase during the pandemic. Since I believe that housing is a good inflation and recession hedge, I do believe this was smart considering other assets like stocks and crypto are in a correction mode and managing a receding economy.
Q: Where do you believe inflation is headed? How has the inflation rate changed throughout the pandemic, and what can we expect to see with inflation moving forward over the next few months/years?
A: I believe inflation has neared its top end this Quarter. Inflation was certainly exacerbated during the pandemic and here in TX with the freeze creating problems. With the now “hawkish” positions of the FED, expect to see inflation come down over the next year along with mortgage rates!
Q: Overall, is now a good time to purchase a home? Will housing inventory continue to increase? Will mortgage rates continue to increase as well in the coming months (your prediction)?
A: Yes, in our market it’s a great time to buy. We are decelerating from ~30% appreciation to 15-20% which will still hold likely thru 2023 but I believe this is like downshifting in speed from 125 mph to 90…a much needed deceleration for affordability across our buying market. Many buyers were held on the “bench” due to shortages of inventory. Borrowing costs are higher…but now for the first time in 2 years….buyers have a chance at getting into a home they can love without bidding over ask, or having as many investors/buyers to compete with. Inventory will increase but our market data suggest that we have a very large shortage (approx. 4k units relative to demand and permits at this moment) so we should hold strong in our values so long as the perception is held within our builder and real estate community to “hold the line” and not “jerk the wheel” with dramatic price shifts. We have seen builders dump a large number of homes into the MLS resulting in a doubling of inventory in a very short period of time. This still represents less than 2.5 months of inventory as I write this. A healthy market is ~6 months inventory. My prediction is that rates will come down as I believe we are in a recession at this time. Since inflation and mortgage rates are correlated….I have been yelling in the streets to buy the home you love and date the interest rate since recessions have been characterized with falling mortgage rates for 50 years. It’s a great time to buy even with rates near double the rates over the last 2 years during the pandemic. If history is our guide, we will have another refinance boom in the upcoming months to take advantage of lower borrower costs. Graph 3 below shows the correlation between recessions and mortgage rates.
Barton Creek Lending Group was founded over 15 years ago and is a full service Mortgage Lender licensed in Texas, with the ability to provide mortgage financing for residential properties, commercial properties, condo projects (including non-warrantable condos), raw land, and construction to permanent "One Time Close" projects.
Dripping Springs Elite Real Estate Professionals is an organization of 25 top producing real estate agents from different brokerages who live and work in Dripping Springs, Texas, and the surrounding area. When trying to decide who you would like to represent you during your next real estate transaction, consider a Dripping Springs Elite Real Estate Professionals member. They have a proven track record, which is one of the criteria for membership.